Advice on a Strategy for Investing for Passive Income

[Glenn Clovis]

My wife and I are closing out the sale of our rental unit in Portland, OR this week.  Using a 1031 exchange we are wanting into investing out of state, preferably in Texas and/or North Carolina.  We have travelled to Texas twice  in the past 6 months to look around and my wife is flying out to Charlotte/Raleigh next week to check out neighborhoods there.  Our primary goal is to establish a decent 'passive' income from the long term rental of whatever units we purchase.  We are shying away from short-term rentals, due to the inconsistent cash flow month to month. We are in our mid-50's and would rather not carry any more debt by assuming new mortgages, unless it is necessary.  My question is in regards to what the best strategy may be to capitalize on the wealth we are investing.  We are looking at approximately $525k (cash) that we need to spend.

[Ryan Kelly]

@Glenn Clovis if your goal is to receive positive cash flow immediately through long-term rentals, and assuming you are putting 20-25% down, you'll want to focus on mid to smaller markets where appreciation hasn't squeezed all the cash flow away. In Texas, some markets to explore might be Temple, Killeen, Waco, College Station, Corpus Christi, the Valley, etc. Even in those markets cash flow from long-term rentals has been getting harder. If you prefer the larger metros, you'll want to consider putting more money down to ensure a positive cash flow. 

[David Schmiediche]

Hey Glenn! For positive Cashflow I have heard great things about Orange, Texas. College Station is worth looking into as well and here it is hard to make properties cashflow and not impossible. With the increased prices and increased interest rates it is getting harder and harder to find something that cashflows. I would recommend looking into putting a larger amount down as well to ensure cashflow just like @Ryan Kelly mentioned.

[Glenn Clovis]

Thank you for the quick response.  We would be buying the properties outright, within the total budget (cash on-hand) of $525k, so possibly two homes at $262k each, or three at $175k, etc.  

[David Ray Norris Jr.]

I would look at small multi family. 2-4 units. You can find that in your price range in many markets and will probably have the highest cashflow for your money spent. 

[Henry Lazerow]

Stick to 2-4 units and use conservative leverage 40-50%. There is no point in buying real estate all cash you will end up with a similar return as taking a 4-5% withdrawal off index fund investing but with way more risk/work. 

[Patrick Drury]

@Glenn Clovis
Nice. I will actually be visiting Portland, Oregon next month! You should buy long-term rentals in the Midwest, which is a great spot for cash flow. I would recommend checking out the Columbus OH market. It's a nice balance of cash flow and appreciation. Also, it has lots of job opportunities and population growth. I also live and invest locally here in Columbus. 

[Kelly Asmus]

Also agree with the small multifamily unit strategy. Anything 2-4 units is easy to finance, 20% down and if you pick the right properties should cash flow right away. Good luck!

[Don-Carlos Moniz]

@Glenn Clovis,

As @Ryan Kelly said, look to smaller markets.  I am not familiar enough with Texas to recommend any, but in North Carolina, Winston-Salem, Jacksonville, and Fayetteville are a few that come to mind.  @Henry Lazerow makes a good point - small MF that is leveraged conservatively should provide very favorable returns, and @Glenn Clovis makes a good point about the Midwest markets.

While I like NC and most of the Sunbelt, there has been a lot of movement into these markets, pushing up purchase prices.  Make sure that you are picking markets that support your investing goals.

Your cash position would easily support a property in the $1.0M to about $1.7M range - good size property, but not too large.  If you are debt adverse, I will encourage you to buy the largest small multifamily you can.  Preferably a property in a stable or growing market with low maintenance costs and low tenant turnover.

There are a lot of different measures of a property's performance, and they each have their merits.  Pick the ones that work for your investing goals and stick with your numbers.  Don't let us dissuade you from a methodology that supports your goals.

[Steven Foster Wilson]

Quote from @Glenn Clovis:

My wife and I are closing out the sale of our rental unit in Portland, OR this week.  Using a 1031 exchange we are wanting into investing out of state, preferably in Texas and/or North Carolina.  We have travelled to Texas twice  in the past 6 months to look around and my wife is flying out to Charlotte/Raleigh next week to check out neighborhoods there.  Our primary goal is to establish a decent 'passive' income from the long term rental of whatever units we purchase.  We are shying away from short-term rentals, due to the inconsistent cash flow month to month. We are in our mid-50's and would rather not carry any more debt by assuming new mortgages, unless it is necessary.  My question is in regards to what the best strategy may be to capitalize on the wealth we are investing.  We are looking at approximately $525k (cash) that we need to spend.

 Hi Glenn,

You should consider investing OOS here in Columbus or Cincinnati. The price to rent ratio makes for great investments. Not to mention our appreciation has been 8% higher then the US national average, because of the high demand for affordable housing. I have helped many clients use there 1031 to find great cash flowing deals. Not to mention Ohio is a landlord-friendly state.

[Henry Lazerow]

An example would be buying a 4 unit in Chicago west town or logan square neighborhood for 1 million with $8000 in rents. Put 50% down and rest in a fixed 30 year loan. Class A tenants never a late payment or issues and steady appreciation with cashflow.  Even during the 08 crash at 50% leverage in class A areas you would of been fine. Be careful of the cheap cashflow areas a lot of these places since 08 crash are now selling 5-10x. Like WI 2 units were $30k and now $200k lol same with NW Indiana. The cashflow lower class markets are extreamly volatile while class A/B major cities tends to not be as volatile if trying to avoid risk. 

[Cory Carlson]

Leverage your money to some extent. ARMs are cheaper money than fixed rate mortgages and if you're investing right, investors should be "repositioning" themselves in their portfolio every 5-7 years anyways (ie. refinance or exchange again). Even moderate leverage will show higher yields in the higher cashflow markets than owning outright. The challenge for investors with significant capital/equity in smaller income-properties is that though positive cash flow is being generated, the CASH-ON-CASH return (%) on invested capital is typically low single digits. And, depending on the effective tax rate of the investor, the after-tax return on cash flow is almost always to some degree even lower.

[Jim Pfeifer]

Have you thought about passively investing in real estate syndications?  As you probably know as a current active investor, when you 1031 into new properties, you will still be an active investor.  If that's what you want - great!  But if you are interested in becoming more passive, you might consider a "Lazy 1031" strategy where you invest the proceeds from your sale of active property into real estate syndications and use cost segregation and bonus depreciation to offset the taxes.  Much less restrictive than a 1031 Exchange.  I am not a tax advisor, but I did use this strategy to sell 38 active doors that had quite a bit of appreciation so I have large capital gains and I did not pay taxes on those gains.  If you are committed to remaining an active investor - go for it!  But, if you want to have someone else manage the asset for you and still get great returns, you might want to consider syndication investing.

Good Luck!

[Colton Hahn]

Quote from @Jim Pfeifer:

Have you thought about passively investing in real estate syndications?  As you probably know as a current active investor, when you 1031 into new properties, you will still be an active investor.  If that's what you want - great!  But if you are interested in becoming more passive, you might consider a "Lazy 1031" strategy where you invest the proceeds from your sale of active property into real estate syndications and use cost segregation and bonus depreciation to offset the taxes.  Much less restrictive than a 1031 Exchange.  I am not a tax advisor, but I did use this strategy to sell 38 active doors that had quite a bit of appreciation so I have large capital gains and I did not pay taxes on those gains.  If you are committed to remaining an active investor - go for it!  But, if you want to have someone else manage the asset for you and still get great returns, you might want to consider syndication investing.

Good Luck!

 Would echo Jim, if your goal is to be passive then actively owning the properties and tending to the tenants and toilets isn't 100% passive even if you have a stellar PM (which will eat into your returns). Could be a situation where you park your capital with a proven operator and let the experts do what they do best while you sit back, relax, and enjoy the summer :)

[Andrew Jambor]

Quote from @Glenn Clovis:

Thank you for the quick response.  We would be buying the properties outright, within the total budget (cash on-hand) of $525k, so possibly two homes at $262k each, or three at $175k, etc.  

 Hi Glenn,

I'm not a tax expert, but looking over the rules of the 1031 exchange, it doesn't look like you can buy these properties outright with cash to qualify unless you had no mortgage on this property. The purchase price of the new property also needs to match or exceed the price of what you are selling your rental for. The other challenge, given the current market, is finding a property that matches your criteria within 45 days of closing. With mortgage rates rising, you would also want to make sure the numbers work and your new property does indeed cashflow. Here is a good reference for the 1031 exchange: https://www.realized1031.com/1...

Make sure you work this out with your accountant as I don't want to see you get hit with capital gains. I've seen investors buying at negative cap rates because they had to do a 1031 exchange and in this market and that can spell trouble. 

Best of luck!

[Tyler Dix]

Hello Glen,

I live and invest in eastern North Carolina, if you would like to talk more about opportunities here feel free to message me directly.

[Brock Mogensen]

You will also want to make sure you are setting up the right systems to create a more passive experience..since it sounds like you want to be less involved in the day to day.  This can be achieved by going for a single larger property and finding a good PM in that market.  An alternative is investing in syndications, if you want to be 100% passive.  However you will likely not be able to 1031 into most syndications.

[Paul Moore]

Hi @Glenn Clovis! You got some great advice above. 2 months have passed, did you make a decision? I am curious. 

For what it's worth, I've done single-family, new construction, managed multifamily and a hotel, and now manage a syndication fund. I agree 100% with @Jim Pfeifer above. There is a world of difference buying a property you are talking about and truly investing passively through a 3rd party syndicator. I recommend you check out Left Field Investors to learn more about their community there if you have any interest in passively investing. Good luck!